Securities Research Services

Friday, October 06, 2006

Why Wednesday's Changed the Outlook

The Dow actually pushed above long term overhead resistance yesterday. Breakouts here are quite suspect, but momentum has the potential to push the market higher through the month, with a bit of backing and filling along the way. Risk increases now as momentum traders take over. For now we will try not to make any sweeping predictions and just ride the trend. As long as we continue to see decent set ups, it makes sense to stay long, using stop losses to protect against a price reversal. When this market comes down, it has the potential to come down fast. Until it does, however, this is no market to be short and long positions should continue to pay off. One brief comment about Wednesday's trading. Prior to the high volume, wide-range day on Wednesday, the market was at a pivotal point. Indices were at resistance. The market was likely to do one of two things that day; either break down or break out. Comments from the Fed helped it break out, which is why we were forced to shed our bearish posture. With the QQQQ breaking over its inflection point on Wednesday, odds seem pretty good that it will work its way back up to test last spring's highs. As it nears those highs, make sure to take profits into strength, but be slow to get bearish. This two month uptrend is at some point going to go through at a minimum a 50% correction. Until we get confirmation that the trend has rolled, however, over, it is a good idea not to sell the dips.

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